Table: Practice Won't Make Perfect
Here's what can go wrong in industries with increasing returns to scale, such as telecom, airlines, and utilities
In the boom phase, businesses race each other to build capacity, hoping dominance will eventually translate into profits.
In the transitional phase, prices begin to fall as companies seek higher sales volumes. It's tempting to cut prices because the cost of producing additional units is very low. But prices become too low to cover huge fixed costs.
In the bust phase, bankers and shareholders pull the plug on companies that can't make money. Even well-run, promising businesses can't get funded. Capacity falls to the point where prices rise. The cycle is ready to repeat itself.